Tuesday, December 20, 2011

Reliance on professional advice defense to accuracy and gross misstatement penalties

The regulation somewhat unhelpfully states that reliance on professional advice is “reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith.”

First, was the adviser a competent professional who had sufficient expertise to justify reliance?

Second, did the taxpayer provide necessary and accurate information to the adviser?

Third, did the taxpayer actually rely in good faith on the adviser’s judgment?

“advice must generally be from a competent and independent advisor unburdened with a conflict of interest and not from promoters of the investment.” “ a promoter is an adviser who participated in structuring the transaction or is otherwise related to, has an interest in, or profits from the transaction.” a tax adviser is not a “promoter” of a transaction when he has a long-term and continual relationship with his client; does not give unsolicited advice regarding the tax shelter; advises only within his field of expertise (and not because of his regular involvement in the transaction being scrutinized); follows his regular course of conduct in rendering his advice; and has no stake in the transaction besides what he bills at his regular hourly rate.

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